Residents & Fellows

Understanding Capitation

Patrick C. Alguire, MD, FACP
Director, Education and Career Development

Capitation payments are used by managed care organizations to
control health care costs. Capitation payments control use of
health care resources by putting the physician at financial risk
for services provided to patients. At the same time, in order to
ensure that patients do not receive suboptimal care through
under-utilization of health care services, managed care
organizations measure rates of resource utilization in physician
practices. These reports are made available to the public as a
measure of health care quality, and can be linked to financial
rewards, such as bonuses.

Capitation is a fixed amount of money per patient per unit of
time paid in advance to the physician for the delivery of health
care services. The actual amount of money paid is determined by the
ranges of services that are provided, the number of patients
involved, and the period of time during which the services are
provided. Capitation rates are developed using local costs and
average utilization of services and therefore can vary from one
region of the country to another. In many plans, a risk pool is
established as a percentage of the capitation payment. Money in
this risk pool is withheld from the physician until the end of the
fiscal year. If the health plan does well financially, the money is
paid to the physician; if the health plan does poorly, the money is
kept to pay the deficit expenses.

When the primary care provider signs a capitation agreement, a
list of specific services that must be provided to patients is
included in the contract. The amount of the capitation will be
determined in part by the number of services provided and will vary
from health plan to health plan, but most capitation payment plans
for primary care services include the following:

Preventive, diagnostic, and treatment services

Injections, immunizations, and medications administered in the
office

Outpatient laboratory tests done either in the office or at a
designated laboratory

Health education and counseling services performed in the
office

Routine vision and hearing screening

It is not unusual for large groups or physicians involved in
primary care network models to also receive an additional
capitation payment for diagnostic test referrals and subspecialty
care. The primary care physician will use this additional money to
pay for these referrals. Obviously, this puts the primary care
provider at greater financial risk if the overall cost of referrals
exceeds the capitation payment, but the potential financial rewards
are also greater if diagnostic referrals and subspecialty services
are controlled. Alternatively, some plans pay for test and
subspecialty referrals via fee-for-service arrangements but are
more typically paid via contractually agreed-upon fee schedules
that are discounted 10% to 30%, compared to the local usual and
customary fees.

Below is an example of a capitation rate schedule. It is for
illustrative purposes only and does not imply a standard for
comparison purposes. The jargon used by managed care organizations
for the capitation rate is PMPM (per member, per month).

Member's Age

Capitation per Member, per Month

10% Withhold

Payment per Member,per
Month

0-1

$25.00

$2.50

$22.50

2-4

$10.00

$1.00

$9.00

5-20

$5.00

$0.50

$4.50

> 20

$15.00

$1.50

$13.50

Other plans may have different schedules based on patient sex,
different categories of ages, and different withhold amounts.

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